Health Care Co-Operatives: Doing It the Right Way

As the U.S. Senate begins final preparations to mark-up health
care reform, some key Senators are considering cooperatives as an
alternative to a public health plan. The aim is to provide a health
plan in any local market that families can feel is part of the
community and always a dependable option.

What Are Co-Ops?

As Senator Kent Conrad (D-ND) and others have noted,
cooperatives (or "co-ops") have a long and rich history. For
example, farmers established co-ops to market and distribute their
produce, workers in some industries organized financial co-ops
called "credit unions," purchasing co-ops offer members access to a
variety of goods and services at favorable terms, and when the term
"co-op" is used in New York city, the speaker most likely means an
apartment building collectively owned by its residents.

The co-op concept is also longstanding and widespread in the
insurance sector, where it is known as a "mutual" insurance
company. Thus, such large well-known companies as Mutual of Omaha
and Northwestern Mutual Life are in fact cooperatives. There are
also successful smaller, niche-market mutual insurers, such as
Church Mutual (which offers lines of property, casualty, and
liability coverage for member religious institutions) and Jeweler's
Mutual (which offers similar coverage lines for members engaged in
making or selling jewelry).

When it comes to health care, a group that "organizes" coverage
provided by insurers could be structured as a co-op, and a company
that provides insurance could also be structured as a co-op. Both
could be present in the same market.

Lots of organizations, some of which are member-owned
cooperatives, help their members get access to various goods and
services on preferential terms. For example, AARP performs this
"organizing" function for its members when it arranges to get them
access to discounts on travel, entertainment, and insurance.
Members of a farm bureau often have access to similar products,
such as financial and insurance benefits.

When it comes to buying health insurance, there are
employer-based groups, such as the Lubbock Chamber of Commerce and
the Cleveland Council of Smaller Enterprises (COSE), that organize
coverage for their members' workers. It is also not hard to
envision applying the same model to other groups of individuals.
Any of the sponsoring organizations could be member-owned
cooperatives.

Why No Health Co-Ops Today?

In the case of cooperative or mutual insurers, while they are a
longstanding feature in most other insurance markets, they are not
found in today's health insurance market. Instead, current health
insurers are organized either as stockholder-owned companies or as
non-profits operated (at least in part and at least in theory) for
charitable purposes beyond simply selling health insurance. There
is a reason for this, as discussed below.

Even the example Senator Conrad cites of Group Health
Cooperative of Puget Sound is organized as a non-profit and is not,
in fact, a mutual insurer. The key difference between Group Health
Cooperative and other non-profit health insurers, such as Kaiser
Permanente, is that Group Health includes in its bylaws provisions
allowing policyholders to apply to be members, and it grants those
members voting rights on certain governance issues, such as the
election of directors. However, Group Health's policyholders do not
have ownership rights in the company the way the policyholder
owners of, say, Northwestern Mutual Life do.

Some argue that federal involvement is necessary to organize,
regulate, and "jumpstart" co-ops financially in the health sector.
However, what is actually needed to allow health co-ops to flourish
is for the federal government to remove barriers in the
marketplace--most importantly itself.

What to Do

If Congress wants to provide Americans access to health co-ops,
it would need to make it possible for an institution to combine
tax-exempt (non-profit) status with mutual insurance status,
something health plans cannot do today. Congress should allow
mutual health insurance companies to form based on the credit union
model. Under this model, Congress would simply grant non-profit
status to mutual insurance companies, justified by the "member
benefit" they provide.

Very likely, with this form of health care arrangement possible,
various non-profit memberships and other organizations might link
with a health co-op to make coverage available. State farm bureaus
or consortia of churches, for instance, could establish such co-op
health insurance.

In addition to these steps, addressing the tax treatment of
health plan benefits in the individual tax code would help spur
co-ops. If families could receive the same tax relief for joining a
co-op--or any other free-standing health plan--as for enrolling in
an employer-sponsored plan, there would be new options for the
uninsured or underinsured.

Health Care Models to Avoid

Senator Charles Schumer (D-NY), a supporter of a public plan,
introduced his key principles on a co-op system that go in the
wrong direction and would end up with a federally run public plan
in all but name. He states that a co-op must be national in scope,
it must secure significant federal start-up funding, and it must be
run by federal officials appointed by the President.[1]

There are "co-op" models that are the wrong way to provide
health care and should be unacceptable to lawmakers, such as
Senator Schumer's thinly veiled public plan version. Simply calling
some form of a government-sponsored enterprise (GSE) a
"cooperative," for instance, would be only another type of public
plan in disguise.

A health insurance GSE, with its close relationship to the
government, would tilt the market playing field and open the door
to political manipulations--both of which would ultimately harm
consumers. It would also create unjustifiable and unaffordable
taxpayer exposure to financial risk.

One need look no further than Fannie Mae and Freddie Mac to see
how GSEs can distort the market and leave taxpayers with huge
liabilities. Decades of market distortions generated by their
implicit government backing, compounded by the effects of repeated
political meddling by Congress, put those GSEs at the very
epicenter of the mortgage market collapse that triggered the
current financial crisis and recession. Furthermore, that GSE
approach has now saddled American taxpayers with hundreds of
billions of dollars in liabilities for just Fannie and Freddie
alone--not counting the additional costs of the follow-on effects
that their market-distorting practices produced in the rest of the
financial system.

Furthermore, the rural electric cooperatives are yet another
example of government involvement in the marketplace gone wrong.
Close to 80 years after their creation, the federal government
continues to subsidize these well-established cooperatives. Having
government directly subsidize private cooperatives in health care
would create similar unjustifiable distortions and taxpayer
risks.

Principles for a Consumer
Cooperative

Health care cooperatives can work as private entities in a
private market and give another choice to families, but they have
to be done right. Here are several principles that must be a part
of any co-op model:

Cooperatives must be voluntary, open to individuals who choose
to freely join together without coercion or restraint, and
controlled by its members, not the government;

Cooperatives must be viable on their own and must not receive
anti-competitive government support in any form including
assumption of risk, "start-up" capital, or continuous subsidies to
the organization--which would turn them into government-preferred
public plans;

Health plans must be selected only by a co-op's members, not
the government;

Competitiveness must be based on the member strength of the
cooperatives and not on any favored status, including government
subsidies, access to government pricing, coverage or coding
decisions, or regulatory intervention;

Any necessary regulation to keep a level playing field among
health plans must be reserved for the states;

State reforms should open doors to competition, including the
competition that cooperatives would bring; and

All individuals--including those who receive public subsidies
and individuals eligible for Medicaid or SCHIP--should be free to
join cooperatives of their choice.

Consumer Choice Is Paramount

The entire basis for lawmakers even pursuing further discussions
of the cooperative insurer concept must be to give consumers more
options and control within the context of a "level playing
field"--with all insurers subject to the same market rules. Under a
true consumer-based cooperative, members would have a trusted
partner to help them obtain private health insurance coverage for
them and their families.